FEDERAL COURT OF AUSTRALIA Lidono Pty Ltd v Commissioner of Taxation [2002] FCA 174 ADMINISTRATIVE LAW – where evidence of principal witness rejected by Tribunal as unreliable – whether Tribunal erred in law by not taking corroborative evidence into consideration – whether Tribunal denied applicant procedural fairness by finding that principal witness had duped corroborative witnesses without that matter being put during hearing Administrative Appeals Tribunal Act 1976 (Cth), s 44 Lidono Pty Ltd v Commissioner of Taxation (Cth) [1999] FCA 1152 Elliott v Kodak Australia Pty Ltd [2001] FCA 1804 Hoskins v Repatriation Commission (1991) 32 FCR 443 Browne v Dunn (1893) 6 R 67 Reid v Kerr (1974) 9 SASR 367 Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation (Cth) [1983] 1 NSWLR 1 Dolan v Australian & Overseas Telecommunications Corporation (1993) 42 FCR 206 Cong Tam Dang v Minister for Immigration & Multicultural Affairs [2000] FCA 73 Kioa v West (1985) 159 CLR 550 F Hoffman-La Roche & Co AG v Secretary of State for Trade & Industry [1975] AC 295 Commissioner for ACT Revenue v Alphaone Pty Ltd (1994) 49 FCR 576 Re Minister for Immigration & Multicultural Affairs; Ex parte Miah (2001) 75 ALJR 889 Re Minister for Immigration & Multicultural Affairs; Ex parte Durairajasingham (2000) 74 ALJR 405 Fletcher v Commissioner of Taxation (Cth) (1988) 19 FCR 442 Marelic v Comcare (1993) 47 FCR 437 LIDONO PTY LIMITED v COMMISSIONER OF TAXATION A 10 OF 2001 GYLES J SYDNEY (HEARD IN CANBERRA) 28 FEBRUARY 2002 IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY A 10 OF 2001 BETWEEN: LIDONO PTY LIMITED APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: GYLES J DATE OF ORDER: 28 FEBRUARY 2002 WHERE MADE: SYDNEY (HEARD IN CANBERRA) THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY A 10 OF 2001 BETWEEN: LIDONO PTY LIMITED APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: GYLES J DATE: 28 FEBRUARY 2002 PLACE: SYDNEY (HEARD IN CANBERRA) REASONS FOR JUDGMENT 1 This is an appeal from a decision of the Deputy President of the Administrative Appeals Tribunal, Taxation Division, ('the Tribunal') dated 21 February 2001 arising out of a dispute between the applicant, Lidono Pty Ltd and the respondent, the Commissioner of Taxation ('the Commissioner'), with respect to income tax payable on the profits from the sale of a piece of land in Queanbeyan, New South Wales. The Commissioner ruled on 4 May 1993 that income tax was payable for the year ended 30 June 1988 on the profits arising from the sale of the land pursuant to the Income Tax Assessment Act 1936(Cth) ('the Act'). The applicant lodged an objection to this ruling on 5 July 1993. The objection was disallowed by the Commissioner in a decision dated 23 April 1996. 2 An application for review of the Commissioner's decision was lodged with the Administrative Appeals Tribunal on 24 June 1996 by the applicant and was heard on 22 and 23 December 1997. On 15 April 1998 the Tribunal affirmed the Commissioner's decision. The applicant then appealed to the Federal Court on a question of law, namely, the adequacy of the reasons provided by the Tribunal at first instance. The appeal was allowed by Finn J on 20 August 1999 (Lidono Pty Ltd v Commissioner of Taxation (Cth) [1999] FCA 1152) due to inadequate reasons on the part of the Tribunal. The decision of the Tribunal was set aside and the matter remitted to the Tribunal to be heard and decided again. 3 The matter was heard in the Tribunal for a second time on the 3, 4 and 5 April 2000, and again on 26 June 2000. The main issue before it was described as: "…whether or not the applicant's profits from the proceeds of sale of various parcels of land constitute assessable income for the purposes of sub-section 25(1) of the Income Tax Assessment Act 1936 ("the Act"). Allied with this, is the issue of whether or not the applicant acquired the said land for the purpose of profit making by sale or for the carrying on or carrying out of any profit making undertaking or scheme within the meaning of these terms by reference to sub-section 25A(1) of the Act." 4 At the Tribunal hearing, both parties were represented by counsel. The Tribunal received various documents into evidence, as well as hearing oral evidence from Mr X, a director of Lidono Pty Limited, Dr G, a medical practitioner, Mr F, a town planner, Ms X, a director of Lidono Pty Limited, Mr A, a managing director, Mr V, a real estate agent, Mr RF, a former manager of a real estate agency, and Mr L, a solicitor. As the transcript reveals, much of the Tribunal hearing was taken up with the cross examination of Mr X. Mr X was a director of the applicant and, as acknowledged by both parties, the controlling mind of the company before, during and after the sale of the land. The central issue at the hearing was whether Mr X, as controlling mind of the applicant, had acquired the land for the purpose of eventually selling the land for profit, or whether, as he said, there was another purpose in acquiring the land, in which case no tax would be payable on the land. The gist of the evidence of Mr X was that the land in question was purchased in order to construct headquarters for a group of companies that he controlled but this did not eventuate, due to later commercial events, and the land was disposed of accordingly. 5 A comprehensive account of the evidence of Mr X and other witnesses is provided by the Tribunal in the Reasons for Decision. It is unnecessary to summarise that evidence. Suffice to say that all of the witnesses other than Mr X gave evidence which corroborated his evidence in the sense that it showed contemporaneous conduct and statements by him consistent with an intention to build headquarters on the land or the subsequent change of events. 6 After reviewing the evidence before it, the Tribunal found that: "…the inescapable and reasonable inference to be drawn is that the sole and only purpose which Mr X (as the controlling mind of the applicant) had at the relevant time, namely, at the time of exchange of contracts of the two parcels of land comprising the A and B land, ie at the time of acquisition of the subject land, was for resale of the subject land at a profit." The Tribunal therefore held that: "…the property, the subject of these proceedings, was acquired by the applicant for the sole and only purpose of profit-making by sale and that the profits flowing thereform and as calculated by the respondent fall to be included in the applicant's assessable income for 1988." 7 The structure of the Tribunal's reasons was that the evidence of Mr X was examined and the conclusion reached that Mr X was not a credible witness regarding his purpose in acquiring the land. Reference was then made to what the Tribunal described as other considerations which support the rejection of Mr X's evidence. The Tribunal then came to consider the other oral evidence. Because of the way the argument has developed, I set out this portion of the Tribunal decision in full: "81. The Tribunal now turns to a consideration of the other oral evidence given in support of the applicant (apart from Dr G). Understandably, the passage of time has taken its toll on the memories of all witnesses to a certain extent. With the exception of Ms X, the Tribunal formed the impression that each of the other witnesses did their best to try and recall the events in question. With respect to Ms X, the Tribunal gained the distinct impression that she at times tailored her evidence to portray events from time to time in a light which did not necessarily accord with the truth of the matter. She was at pains to portray events in such a way as to try and assist her brother Mr X. The Tribunal has reservations about accepting her evidence except wherever it might be said to be supported by the collective evidence of the remaining witnesses. Despite the ravages of time and the reservations about Ms X, the Tribunal is prepared to make the following findings. 82. Prior to the purchase of the subject land, the X group of companies occupied offices outside the region where the X group's activities were centred. These offices were small in size and inadequate as time went by to readily accommodate the staff of the X group. There was a need to establish corporate headquarters for the X group in the region in which they were operating and that need was present at the time of the purchase of the subject land. That need became more pressing as time went by. The Tribunal finds that Mr X, as and from the first siting of the subject land, did from time to time express to others that the land in question was for the purpose of providing corporate headquarters for the X group. This is clear from the evidence of those who were associated in various ways with the X group. 83. The evidence of the solicitor Mr L, as already referred to in these reasons, is accepted by the Tribunal. He was an impressive witness in the opinion of the Tribunal. 84. The Tribunal has formed the firm view, after having given careful consideration to the totality of the evidence before the Tribunal and the views formed by the Tribunal in relation to that evidence, together with the submissions made by the parties, that not only must the evidence of Mr X as to his intentions at the time of acquisition of the subject property be rejected, but that the inescapable and reasonable inference to be drawn is that the sole and only purpose which Mr X (as the controlling mind of the applicant) had at the relevant time, namely, at the time of exchange of contracts of the two parcels of land comprising the A and B land, ie at the time of acquisition of the subject land, was for resale of the subject land at a profit. The subject land was clearly a valuable piece of land with the potential for subdivision and on-sale. Its position in the central business district of the particular region was central and high profile in terms of exposure to the public and passing traffic. Its zoning was advantageous. Located on the same block and immediately adjacent was a national high profile fast food outlet. 85. The Tribunal has no doubt that the potential for the subject land to be sold for a substantial profit immediately came to the mind of Mr X when he was first introduced to it. As indicated, the Tribunal is satisfied that Mr X let it be known that the dominant purpose of the acquisition was to establish corporate headquarters for the X group. Bearing in mind Mr X's experience as a business man and land developer over many years and the Tribunal's impression of his when giving his evidence, the Tribunal is of the view that Mr X let the above referred to purpose be known to hide his true and only purpose, ie that of profit-making by sale. Put in other terms, Mr X did not strike the Tribunal as being a person who would have told others that he was acquiring the subject land for the sole purpose of making a profit by sale." 8 The applicants filed a Notice of Appeal pursuant to s 44 of the Administrative Appeals Tribunal Act 1976 (Cth) ("the AAT Act") on 21 March 2001. The purported questions of law propounded were: 2.1 Whether the Tribunal was entitled to have regard to the decision and reasons of a differently constituted Tribunal? 2.2 Whether the Tribunal in determining whether the Applicant acquired the property for the purpose of profit-making by sale, had regard to an irrelevant consideration, namely whether the Applicant's prime purpose in acquiring the land was for corporate headquarters rather than other long term commercial development? 2.3 Whether the Tribunal, on the basis of an impression formed of the principal of the Application (Mr X), was entitled to speculate in a manner unsupported by any evidence, namely: (a) that Mr X was well-versed in the tax implications which may attend to the buying and selling of land; (b) that Mr X would not baulk for a moment in taking on a viable commercial development; (c) that Mr X is not a person who lacked the skills and perceptions regarding the opportunity to make a profit; and (d) that the listing of the subject land served the purpose of alerting the market that it was available for sale. 2.4 Whether the Tribunal was entitled to draw inferences contrary to the evidence, namely: (a) that Mr X let it be known that the dominant purpose of the acquisition was to establish corporate headquarters to hide his true and only purpose; (b) that the ultimate sale of the land realised the potential which Mr X had foreseen at the time of acquisition. 2.5 The evidentiary burden to be satisfied by the Tribunal." 9 The grounds alleged were: "4.1 It is apparent from the Reasons for Decision of the Deputy President that he had regard to the decision and reasons of the Tribunal constituted by Mr Beddoe which gave its decision on 15 April 1998. To do so not only had the capacity to prejudice the Deputy President but caused the hearing to be unfair to the Applicant. 4.2 The Deputy President erred in that he regarded evidence of commercial development as inconsistent with the absence of a purpose on the part of the Applicant of profit-making by sale without determining the nature of that commercial development. 4.3 The Deputy President formed an adverse view of the principal of the Applicant [sic]. He erred in that, having formed that impression, he substituted speculation for evidence in that he made findings which were not supported by any evidence, namely: (a) that Mr X was well-versed in the tax implications which may attend to the buying and selling of land; (b) that Mr X would not baulk for a moment in taking on a viable commercial development; (c) that Mr X is not a person who lacked the skills and perceptions regarding the opportunity to make a profit; and (d) that the listing of the subject land served the purpose of alerting the market that it was available for sale. 4.4 The Deputy President erred in that the [sic] drew inferences which could not reasonably be supported by the evidence, namely: (a) that Mr X let it be know that he [sic] dominant purpose of the acquisition was to establish corporate headquarters to hide his true and only purpose; and (b) that the ultimate sale of the land realised the potential which Mr X had foreseen at the time of the acquisition. 4.5 In relation to the errors set out in 4.3 and 4.4 above, the Deputy President erred in that the Tribunal proceeded on the basis that, having formed an adverse view of Mr X, in effect a party to the proceedings, it was open to the Tribunal to make findings informed by that adverse view but not by the evidence. 4.6 The Deputy President erred in that he made findings of fact for which there was no evidence. 4.7 The Deputy President erred in that he made findings of fact for which the evidentiary burden had not been satisfied." 10 The written submissions for the applicant did not pursue all grounds, but put in issue a number of aspects of the reasons of the Tribunal, with no proper question of law isolated. Counsel pursued the same path in oral submissions in what amounted to a wholesale attack upon the decision-making process of the Tribunal. In the course of argument it became plain that the principal complaint of the applicant was that the credit of Mr X was assessed and rejected before the body of corroborative evidence was considered. That could be a ground upon which a new trial might be ordered if established and if a full appeal lay (Elliott v Kodak Australia Pty Ltd [2001] FCA 1804 at [29]-[38]) but hardly gives rise to a question of law pursuant to s 44 of the AAT Act. Counsel for the applicant submitted that, in truth, the corroborative evidence was not considered at all. In my opinion, this cannot be sustained. I have set out the manner in which the Tribunal expressly dealt with that evidence. The interrelationship between it and the evidence of Mr X is set out in the reasons of the Tribunal at [85]. How that evidence was to be assessed was a matter for the Tribunal, and no question of law arises. The legislature has provided that the Tribunal has the role of deciding the facts and, absent any legal error, may do so in a way which a court might think is wrong. 11 The importance of par 85 of the reasons of the Tribunal led counsel for the applicant to expand orally upon a point made in its written submission to the effect that the finding made by the Tribunal that Mr X had "duped" a significant number of persons, including fellow directors and financiers,as to the true purpose of acquiring the parcel of land, was never expressly or impliedly put to the taxpayer during the course of the hearing, and that such a finding should have been put to Mr X to give him the opportunity to respond to such a suggestion. Discussion of this point led to an amendment of the Notice of Appeal by adding to the questions of law: "2.6 Whether the Tribunal, in making its findings of fact as set forth in paragraphs [68], [80] and/or [85] of its Reasons for Decision, denied the Applicant procedural fairness. 2.7 If the Tribunal did deny the Applicant procedural fairness in making the said findings, was such a denial of procedural fairness a "question of law" within the meaning of and for the purposes of s 44 of the Administrative Appeals Tribunal Act 1975." and adding the ground: "4.8 The Tribunal denied the Applicant procedural fairness by making those findings of fact as set forth in paragraphs [68], [80] and/or [85] where such findings of fact were not sought by the Respondent Commissioner and were not put to the Applicant by either the Respondent to the proceedings or the Tribunal itself in order to ensure that the Applicant had an opportunity to either adduce additional evidence or make such further submissions as it saw fit." 12 I should say at the outset that the Commissioner accepts that a denial of procedural fairness is a question of law within the meaning and for the purposes of s 44 of the AAT Act. 13 The following submissions were made for the applicant. The finding that Mr X deliberately set forth to mislead others as to the true purpose of acquisition was central to the conclusion of the Tribunal. That conclusion was neither incidental to its reasoning nor irrelevant. The applicant contended that those findings of the Tribunal as set forth at [68], [80] and [85] of its reasons for decision were neither · expressly nor · impliedly put to Mr X during the course of any questioning of him by either counsel for the Commissioner or by the Tribunal. Nor was such a finding advanced by counsel for the Commissioner during the course of his oral or written submissions. It was no part of the Commissioner's case that Mr X had set forth to deceive his colleagues. Indeed, the Commissioner implicitly accepted that "a" purpose in acquisition was relocation: "… Mr Erskine submitted that … the Tribunal should not believe Mr X's evidence that his only purpose was to build a corporate head office on the land." Such a failure constitutes a denial of procedural fairness. A submission that a witness should not be believed is different to a submission that a witness has set forth to mislead others. Questions suggesting that a witness is not telling the truth contain no suggestion that he sets forth to mislead others. The former questions do not "inherently" put in issue the latter: Hoskins v Repatriation Commission (1991) 32 FCR 443 at 446. 14 Having considered the aspects of the evidence and procedure before the Tribunal to which I have been referred, I am satisfied that what the applicant calls the "duping" allegation was not put expressly to Mr X in cross-examination and was not put to the Tribunal in address by counsel for the Commissioner. So far as I can see, it was not raised by the Tribunal member in the course of the hearing. 15 The submissions in response on behalf of the Commissioner largely focused upon the effect of the rule in Browne v Dunn (1893) 6 R 67, reference being made to cases such as Reid v Kerr (1974) 9 SASR 367, Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation (Cth) [1983] 1 NSWLR 1 and Dolan v Australian & Overseas Telecommunications Corporation (1993) 42 FCR 206. Whilst this is one aspect of the matter, there is a wider problem – the claim by the applicant that it had no opportunity of dealing with the issue at all. 16 The substance of the Commissioner's position is that it must have been plain to all that Mr X's evidence as to his true purpose was in issue and that the truth of his evidence was challenged. He was cross-examined at length. If his evidence were not challenged, then the applicant must have succeeded. In short, there would be no case if the evidence of Mr X as to his intention was not challenged. It was up to the applicant to call all the evidence it could to support the evidence of Mr X, and it did. It is not suggested that it refrained from doing so due to misapprehension as to the issues. There was nothing more it could have done – or could do if the matter were returned to the Tribunal. It must have been obvious that if the corroborative witnesses were accepted but Mr X were not, then he must have been laying a false trail. It was submitted that the decision of the Full Court in Cong Tam Dang v Minister for Immigration & Multicultural Affairs [2000] FCA 73 (particularly at [88]-[93]) shows the proper approach in a situation such as the present. 17 Whilst it is accepted by both parties that procedural fairness must be accorded by the Tribunal, the content of that obligation must be judged in a practical way, bearing in mind that the procedure of the Tribunal is governed by s 33 of the AAT Act, which provides: "(1) In a proceeding before the Tribunal – (a) the procedure of the Tribunal is, subject to this Act and the regulations and to any other enactment, within the discretion of the Tribunal; and (b) the proceeding shall be conducted with as little formality and technicality and with as much expedition, as the requirements of this Act and of every other relevant enactment and a proper consideration of the matters before the Tribunal permit; and (c) the Tribunal is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate." (Kioa v West (1985) 159 CLR 550, 584-585, 612-613) 18 A fundamental aspect of procedural fairness is that a party should know the case it has to meet and have the opportunity of meeting it. A party should not be ambushed, to use an evocative word which appears in some of the cases. I can appreciate that the applicant may have a sense of grievance at a finding about a principal witness being made without warning, either from the other side or the Tribunal, prior to the decision, and may regard itself as having been ambushed. In one sense, that is correct. 19 On the other hand, the nature of the proceedings meant that the subjective intention of Mr X was plainly in issue and it behove the applicant to produce all it could to corroborate him. It did so. The Tribunal did not rely upon any new fact or matter, or any new basis for liability – it considered, and took a view about, the evidence which was before it. The result which ensued was open as a logical and a practical possibility upon the whole body of evidence. The "ambush", if there was one, was as to the reasoning of the fact finder. 20 In my opinion, a tribunal, in assessing and reconciling material before it, is not bound to accept or reject any piece of evidence in whole, and it is often the case that a view of the facts is found which does not accord with the evidence or submissions by either side. In my opinion, that is what occurred here. Provided that such a view is properly open on the evidence, and does not involve the use of any fresh undisclosed material or undisclosed head of liability or defence, in my view, the Tribunal is not bound to call the parties back and warn of that possibility. As Lord Diplock said in F Hoffman-La Roche & Co AG v Secretary of State for Trade & Industry [1975] AC 295 at 369: "… the rules of natural justice do not require the decisionmaker to disclose what he is minded to decide so that the parties may have a further opportunity of criticising his mental processes before he reaches a final decision. If that were a rule of natural justice only the most talkative of judges would satisfy it and trial by jury would be abolished." See the discussion in Commissioner for ACT Revenue v Alphaone Pty Ltd (1994) 49 FCR 576 at 590-592, cited with approval by Kirby J in Re Minister for Immigration & Multicultural Affairs; Ex parte Miah (2001) 75 ALJR 889 at [194]. It is relevant to bear in mind that the essence of the case was whether the Tribunal believed Mr X. This is a finding on credibility which is a function of the Tribunal par excellence (Re Minister for Immigration & Multicultural Affairs; Ex parte Durairajasingham (2000) 74 ALJR 405 at [67]). 21 This conclusion is consistent with the authorities to which counsel have referred, although decisions on other factual situations are of limited value. Fletcher v Commissioner of Taxation (Cth) (1988) 19 FCR 442 is a good example of a new ground of liability being imposed without warning. On the other hand, in Hoskins v Repatriation Commission at 447 Pincus J said: "It is my opinion that where the claim is one of a severe depressive neurosis, it is open to the Tribunal to find its severity to be exaggerated, consciously or otherwise, without having put that suggestion to the claimant. It is my opinion that such a claimant must, especially when represented professionally, surely appreciate that his or her task is to convince the Tribunal of the reality and seriousness of the complaints made. Following the South Australian case just referred to, I hold that there was no obligation in the Tribunal, or in the respondent's representative at the hearing before the Tribunal, to question the applicant along the lines submitted by Mr O'Gorman, and that the failure to do so was not an infringement of the requirements of natural justice." The decision of the Full Court in Cong Tan Dang at [88]-[92] arose in somewhat similar circumstances and the reasoning does support the Commissioner's contentions. The decision of Beazley J in Marelic v Comcare (1993) 47 FCR 437 illustrates that the express disavowal of a point may alter the situation. 22 In my opinion, the applicant has not made out any of the grounds alleged. The application is dismissed. The applicant is to pay the costs of the Commissioner. I certify that the preceding twenty- two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles. Associate: Dated: 28 February 2002 Counsel for the Applicant: GA Flick SC and D Alexander Solicitor for the Applicant: Colquhoun Murphy Counsel for the Respondent: CM Erskine Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 7 December 2001 Date of Judgment: 28 February 2002